If EFAs ARE PMSIs, Are They Exempt from Disclosure Laws?

The title may sound like a Dr. Seuss book, a riddle or the start of a limerick. However, this is no joke. Although this discussion presently applies to only a few states, it is still quite important. The issue, elucidated, is simple: Do the commercial finance disclosure exemptions that exist in certain states for purchase money security interests (PMSIs) encompass and exempt equipment financing agreements (EFAs)? It’s a simple question, but it might beget a controversial answer.

These are the states that presently exempt PMSIs from disclosure laws:

1. Utah: (Utah Code §7-27-102): The provisions of this chapter do not apply to: (8) a commercial financing transaction that is a purchase-money obligation as defined in Section 70A-9a-103(1): That code section states:
   1. “purchase-money collateral” means goods or software that secures a purchase-money obligation incurred with respect to that collateral; and
   2. “purchase-money obligation” means an obligation of an obligor incurred as all or part of the price of the collateral or for value given to enable the debtor to acquire rights in or the use of the collateral if the value is in fact so used.
2. Florida: (Florida Code Part XIII §559.9612: Scope of this part.). This part does not apply to a purchase money obligation that is incurred as all or part of the price of the collateral or for value given to enable the business to acquire rights in or the use of the collateral if the value is in fact so used. [Definition omitted as it is similar to Utah]
3. Kansas: (Kansas Senate Bill 345 §3): The provisions of this act shall not apply to a purchase money obligation that is incurred as all or part of the price of the collateral or for value given to enable the business to acquire rights in or the use of such collateral if such value is so used. [Again, definition omitted as repetitive]
4. New Jersey: This state is still wrestling with the enactment of this bill and has been for two years. It is still on the table as what is termed a “carry-over” bill. If passed in its current form, it will exempt a lease as defined in N.J.S.12A:2A-103 or a purchase money obligation as that term is defined in N.J.S.12A:9-103;

By way of background, the definition of a PMSI is generally defined in the Uniform Commercial Code UCC §9-103(a) as follows:

1. “purchase-money collateral” means goods or software that secures a purchase-money obligation incurred with respect to that collateral; and
2. “purchase-money obligation” means an obligation of an obligor incurred as all or part of the price of the collateral or for value given to enable the debtor to acquire rights in or the use of the collateral if the value is in fact so used.

This definition is not significantly different from the one utilized by the three states exempting PMSIs from disclosure obligations. Although most states have adopted some version of the UCC, occasionally with modifications, the substance of the UCC provisions is generally consistent throughout the country. Importantly, however, there are variations and nuances in specific sections of the UCC from state to state. So, while UCC Section 9-103(a) iterations exist in all states that have adopted the UCC, the exact wording may differ slightly depending on any state’s specific proclivities. Therefore, it’s essential to consult the particular version of the UCC adopted in the relevant jurisdiction for precise details.

Still, per the UCC, a “purchase money obligation” arises when an obligor, defined in the UCC as a person who, with respect to an obligation secured by a security interest, i) owes payment or other performance of the obligation, ii) has provided property other than the collateral to secure payment or other performance of the obligation, or iii) is otherwise accountable in whole or in part for payment or other performance of the obligation. “Purchase Money Collateral” includes goods and software that secure a purchase money obligation. UCC §9-102(a)(59).

In my opinion, this definition appears to include the EFA lender who owes performance of an obligation to the vendor. It should not matter that the goods and the payment obligation have been transferred to the borrower since the lender still retains the security interest, and the original payment obligation to the vendor has been assigned to the borrower for repayment to the lender. By my interpretation, this constitutes a PMSI and is exempt from disclosure obligations.

As more states enact disclosure obligations, we must assume that some will be modeled after Utah, Florida and Kansas. The issue is unclear, and perhaps arguments can be made on both sides. I more than welcome any thoughts on this subject.

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